The government is fully capable of maintaining financial stability if
it remains prudent on lending, strengthens supervision, and controls
credit risk, the
Ministry of Finance said in a statement on Friday, a day after S&P cut
China’s sovereign rating for the first time since 1999. The decision is
"perplexing" because the economy is on a solid footing, the ministry
said.

China can maintain reasonable credit growth, and S&P also ignores
the characteristics of the country’s financing structure, the ministry
said. Under the Budget Law, the debt of local government financing
vehicles should be paid by those state-owned enterprises themselves, and
local governments don’t shoulder the liabilities, it said.

The downgrade, the second by a major ratings company this year, comes
just before President
Xi Jinping gathers delegates from the ruling elite for the Communist
Party’s twice-a-decade congress, set for October 18. Xi has made it a top
priority this year to curb debt risk and ensure stability before his big
moment, which will include a reshuffle of top leaders.

The ministry also objected in May to the
downgrade by Moody’s Investors Service, calling it “absolutely
groundless” to argue that local government financing vehicles and
state-owned enterprise debt will swell the government’s contingent
liabilities. The agency underestimates the capability of the government
to enact reforms and boost demand, the ministry
said.

The official Xinhua News Agency also responded to S&P. The
downgrade isn’t surprising, as the agency’s theory doesn’t reflect
China’s fast economic development, Xinhua
reported, citing
Qiao Baoyun, a researcher at China’s Central University of Finance and
Economics.

The problems S&P identified, including the need to deleverage and
prevent local government debt risk, are a "friendly reminder," the
state-run news service said, adding that China doesn’t need to heed
unreasonable demands, or "cut its feet to fit the shoes."